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Pentagon Seeks to Establish ‘Cost Culture,’ Official Says

WASHINGTON, May 14, 2013  In an effort to maximize investments of defense business opportunities during austere times, the Defense Department is seeking to establish a “cost culture,” a senior Pentagon official said here today.

Elizabeth A. McGrath, the Defense Department’s deputy chief management officer, spoke to an audience during the Excellence in Government Forum about DOD’s efforts to optimize business opportunities in support of the department’s core mission.

McGrath’s office advises the defense secretary and deputy defense secretary on matters relating to the management and improvement of integrated defense business operations.

“We’re looking at establishing a cost culture within defense,” McGrath said. “We’re really, really good at putting together a budget. We do it every year without fail. We do budget formulation. We even do execution of that budget. But what we are really focusing our attention on now is the cost of operation.”

McGrath said this cost analysis plays a crucial role in considering business investments.

“Do you know how much it costs per transaction?” she asked. “Do you know what makes up the cost elements?”

Every company, McGrath said, looks at what is driving cost when they evaluate what is profitable and what is not.

“We do this every day at home,” she said. “We look at what’s driving our costs. There are cost decisions we make every day. It’s applying that same thought process that businesses have -- that we have as individuals -- to the execution of the business space.”

When evaluating these cost drivers, McGrath said, there should be a consideration of whether there is a good return on investment. “If it’s not there, we have to say no,” she added. “We’re not going to make that investment, because in this fiscal environment we just don’t have the dollars.”

This approach requires thinking differently, McGrath said.

“It has been a very difficult conversation within the Defense Department, within the business space,” she told the audience. But that approach makes it possible to make informed decisions, she said, if there is an understanding of exactly what the cost drivers are.

McGrath noted the Defense Department is “for sure, the largest government entity,” and in terms of numbers, would be the 16th-largest country in the world, with 3 million to 3.5 million people, 5,000 locations worldwide and a multi-billion-dollar global supply chain. DOD also is the largest health care provider in the nation, she said.

McGrath used information technology as an example of considering the right strategy to achieve the right outcome in the business space.

“Annually, we spend about $7 billion, and we have over 2,000 IT systems,” she said. “In my opinion, that’s too many, but what we don’t want to do is say, ‘Well, let’s just cut 10 percent of those,’ not understanding the strategic impact of doing that.”

McGrath said it is critical to understand how to tie the investment to the strategy to achieve the desired outcome. “What business outcome are you trying to achieve?” she asked. “How does the IT enable you to get there?”

“Typically, it’s oftentimes a blunt-object approach to cutting costs,” she said. “And I really think that the government -- especially over the last couple of years, but certainly historically -- has cut a lot of the easy things.”

McGrath said the current fiscal environment requires different, more strategic, thinking about how to make budget cuts and achieve the mission within the fiscal targets that are provided without disrupting the mission.

Certainly, she said, national security is the Defense Department’s core mission.

“What I often tell many people is you have to sort of look up and out across the enterprise,” McGrath said. “We execute from an end-to-end perspective. There’s nothing that is just financially focused. There’s nothing that is just personnel focused. Every personnel action has a financial transaction.”

In the current and projected fiscal environment, McGrath said, defense officials must think differently to optimize available dollars. And that’s difficult in a culture that favors certainty, she added.

“We really are risk-averse,” McGrath said. “We don’t like to take the risk. We want to ensure success before taking a risk. I think the fiscal environment really allows us to take a little more risk to execute, if you will, bigger and bolder thoughts about how we execute the mission. And so, I really do think it’s time to think differently.”